Individual taxation
The Credit and AMT
Credits cut tax dollar for dollar; refundable ones can pay you back, and the AMT is a parallel tax you compare against.
How the exam words it
- -The stem asks the amount of the child tax credit, the American opportunity credit, or the lifetime learning credit.
- -It asks whether a credit is refundable or nonrefundable, or which survives when tax reaches zero.
- -AMT preferences and adjustments are listed and it asks for alternative minimum taxable income or the AMT.
- -Education credits phase out or overlap and it asks which is better.
The playbook
- 1Separate refundable credits (the earned income credit and the refundable parts of the child credit and the American opportunity credit) that can generate a refund from nonrefundable ones (lifetime learning, dependent care) that only reduce tax to zero.
- 2Size the education credits: the American opportunity credit is 100 percent of the first $2,000 plus 25 percent of the next $2,000 per student and is partly refundable, while the lifetime learning credit is 20 percent of up to $10,000 per return.
- 3Compute the AMT by starting from taxable income, adding back preferences and adjustments (the standard deduction, state and local taxes, certain private-activity bond interest), then subtracting the AMT exemption.
- 4Pay the AMT only when the tentative minimum tax exceeds the regular tax; the excess is the AMT.
The trap
Adding back the wrong items for the AMT. The AMT disallows the standard deduction and state and local taxes, but not charitable contributions or qualified mortgage interest.
How the exam varies it
The same pattern, re-skinned along these axes:
Refundable versus nonrefundable creditsWhich credit: child, American opportunity, lifetime learning, or dependent careCredit computation versus the AMT preference add-backs
Drill this pattern
8 questions of The Credit and AMT from across the AUD topics. Clear it by getting 5 right with a streak of 3.